The inadequate approval process that saw governments state and commonwealth approve $80 billion of export gas terminals at Gladstone has left domestic customers exposed to rare cost-and-supply risk and the nation’s taxpayers really should pay the price of that failure.

That, at least, seems to be the view of the
Australia Industry Group
’s straight talking boss,
Innes Willox
.

Willox of course, represents the struggling collective that is Australia’s export-exposed industries. On Monday he did what industry ever has in this country – he turned to government to ease the financial burden of structural transition.

Willox is plainly sceptical of a view shared by federal government and gas industry that the looming price crisis will likely be relatively short-lived as market forces will trigger a mitigating supply-side response.

But if the government really believes this will be the case, then it should put our money where its rhetoric is, Willox argued.

“If the government believes that price relief is coming eventually, there could be a case for temporary public financial support for businesses whose competitiveness is at risk from the gas price surge," Willox told the East Coast Gas Outlook Conference in Sydney on Monday.

Take responsibility for unintended consequences

“This would hardly be uncontroversial, particularly at a time of tightly constrained budgets. But the Commonwealth and the states took the decision to allow the eastern Australian gas market to be linked to the high-price east Asian gas market. They should not escape responsibility for the unintended consequences."

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Of course these are but two headline grabbing paragraphs out of the 60 that made up Willox’s speech, and a majority of them make a fair bit more sense.

But I suspect this indulgence of rent-seeking-past will divert attention from what is an otherwise pretty worthy and frank assessment of the roots of the national gas problem and the growing gulf that separates main mainstream producers from their host communities and their dependent customers.

Willox’s description of the “uninformed consequences" of the importing of regional gas prices is well-informed and useful.

Willox reported that a survey of Ai Group members showed that 10 per cent of those tendering for a gas contract were unable to extract an offer from any supplier, and a third of them did not get a response “they considered serious".

Pricing reflects rising costs

The same survey endorsed numbers we mused on last week. The fact is that retiring long-term contracts are delivering gas at $3-4 a gigajoule, and that replacement deals are being set at $9 and beyond. That pricing reflects rising costs of production as coal seam gas becomes ever more a mainstay of supply and as the Gladstone freezers become a gateway for regional, oil-linked gas pricing. “This is a huge transformation," Willox said. “Energy users’ costs would increase by about $5 billion a year. That’s more than the gross revenue the carbon price would raise in 2015-16, and comes without any compensation. The gas price shock is a big part of the death of the competitive advantage Australia once enjoyed in energy costs."

Like nearly everyone else, Willox reckons the essential problem here is that, for a host of reasons, gas supply has not increased enough to cater for both export and current and future domestic demand.

“Let’s be absolutely clear: higher gas production is a necessary part of any solution. Gas demand is going up enormously thanks to export, and conventional supplies will not be adequate. Breaking the LNG export contracts and writing off the billions invested in the export terminals is simply unthinkable. That horse has bolted. The gas has got to come from somewhere.

“But practicalities, perceptions and politics mean that simply proposing to get more gas out of the ground is not enough. How will we deal with the price transition? Environmental fears? And lack of trust?"

Painful transition

One path to bridging the gulf in community trust might be to run a national interest test over all future proposals for new LNG projects or yet un-approved expansions to existing ones. “Such a test should not be startling," Willox suggested. “It is the expansion of LNG exports that lies behind the painful transition in eastern Australia’s gas market. The current set of projects were not subject to adequate consideration of economic impacts before approval. For all the demands of the environmental impacts process, in the economic arena they sailed through without real debate."

The approval process envisaged by the Ai Group would see final approval lie with the federal Treasurer, who would act on external expert advice that would assess the project on a series of consistent criteria and whose final recommendation would be published. Willox said approval should rest on whether there is adequate and available gas to cover present and future domestic demand; the economic, strategic and social impacts of the proposal and some account of the comparative net benefit of the delivering to export markets against retaining gas for the domestic system.

No doubt the gas industry, like everyone else in the extractive sector, is weary of the ever-lengthening queue of hurdles that stand between discovery and production. But a test built on known triggers, that is as independent as it is transparent and that is consistently credible, could help underpin a recovery of community confidence in the sector.

“This is no time for complacency or to hope that someone else will fix NSW’s problem," Willox said. “Just saying no is not an answer in this case and there needs, instead, to be a focused effort to resolve the impasse between gas producers, industry and sections of the farming community and some residents of centres near gas reserves who refuse under any circumstances to enter into sensible and logical discussion.

“On this issue – like on every other consequence – we need balance and long-term thinking, not shrill short termism."

“We have to leave fossil fuels in the ground. This is not going to be solved by
BHP
alone. There has to be a new conversation started about how we are going to do this. It will have to involve the company, the investment community, other corporations around the world to say that sterilisation has to occur and discuss the mechanism that can make it happen."

This narrative informs the election pitch by former big-ticket oil and coal man, 71-year-old
Ian Dunlop
. He is attempting to gain the 50.1 per cent support necessary to see BHP Billiton shareholders reward his “road to Damascus" enthusiasm with a place on the mining company’s board.

BHP is a mining company with a massive point of sectoral difference in that is produces oil and gas too.

Over recent years the successful and safe extraction of fossil fuels in the form of coal, gas and oil has generated just more than 30 per cent of BHP’s profit and slightly less than that proportion of sales revenues. Last year, for example, the global Australian’s fossil fuel projects sold $US23.9 billion worth of energy, making $US6.39 billion.

Patently, then, given that producing fossil fuels is still both legal across the sweep of international jurisdictions and an essential underpinning of economic progress across our human universe, it is in the interests of BHP and its shareholders that this extractive bounty is maintained and strategically expanded.

Some might have patience and more for the sort of “conversation" that Dunlop wants to have. I don’t. BHP’s boardroom isn’t an appropriate chatroom for Dunlop’s tilting on climate change.

BHP is a mining and energy company. It also eats a lot of energy in transforming minerals into metal, and gas into exportable liquids. It has accepted the science supporting the conclusion that carbon emissions have contributed to global warming.

It is committed to reducing its own carbon footprint but also to manufacturing profits from selling coal, gas and oil. BHP’s coal and oil basins sit among the fleet of 100-year assets around which it has constructed the long, balanced portfolio strategy that marks it as so different from any of its global peers.

The idea that those assets should be “sterilised" would seem to be thoroughly antithetical to the short- and medium-term interests of BHP’s owners.